Amazon & Shopify Sales Tax: What Ecommerce Sellers Get Wrong

Here's what I want you to understand. In most of these cases, the seller didn't do anything malicious. The rules around sales tax for multi channel ecommerce are genuinely confusing. Amazon does some things, Shopify does other things. The two don't always add up to full compliance. And the gaps are where exposure lives.

Today I'm going to walk you through the most common reasons that Amazon and Shopify sellers end up with past due sales tax. What causes it, where the settings go wrong, the difference between two very different kinds of problems, and how to clean it up without blowing up your cash flow.

Stay with me through the middle section especially. That's the part about what Shopify does and does not do for you. And this is the piece that most sellers get wrong. It's also the piece that creates the most expensive surprises.

1:15

Let's start with why this happens, because if you understand the root cause, everything else makes sense.

Sales tax in the US is a state by state system. There are 45 states with state sales tax, and each one has its own rules, its own thresholds, its own registration requirements, its own filing deadlines. There's no single federal system that ties it all together.

When you sell on one platform, in one state, to one type of customer, that's manageable. But most ecommerce sellers don't look like that. Most sellers are on Amazon and Shopify. They're selling in 30 or 40 states. They've crossed economic nexus thresholds without tracking it, and they're working off the assumption that the platforms are handling compliance for them.

That assumption is where it breaks down. Amazon handles some of it, Shopify handles some of it, but neither of them handles all of it. And the parts they don't handle, that's entirely on you. Let me show you exactly where the lines are.

2:12 What Amazon does and doesn't do

Let's talk about Amazon first. Under marketplace facilitator laws, Amazon collects and remits sales tax on behalf of third party sellers for transactions completed through their platform. All 45 states with the state sales tax have these laws now. So when a customer buys your product on Amazon, Amazon is calculating the tax, collecting it from the customer, and sending it to the state. You don't touch that money.

For a lot of sellers, that sounds like, hey, problem solved. Except it's not. Here's what Amazon does not do.

One, Amazon does not register you. Amazon collecting tax does not mean that you're registered. Registration is a separate step that is entirely your responsibility, and in many states you're required to be registered and filing even if Amazon is handling all the collection. In those cases, what you're filing is a $0 return, but the obligation to file still exists. States like Washington, California, and Pennsylvania are known for requiring this, and if you're not registered, you're technically non compliant even in states where you owe nothing. We have a video about how to do this right here.

3:20

Second is that FBA creates nexus. This is the one that surprises sellers the most. When Amazon stores your inventory in their fulfillment centers, those products are physically sitting in multiple states. That creates physical nexus in every one of those states, and physical nexus means an obligation independent of how much you've sold there. Amazon has fulfillment centers all over the country. If you're using FBA, you may have physical nexus in eight or 10 states right now, and the only way to know which ones is to pull your inventory placement from Seller Central.

Amazon does not cover your other channels. If you're also selling on your own Shopify store, or through wholesale, or anywhere outside of Amazon, Amazon collects nothing on those transactions. You're fully responsible for sales tax on every sale that doesn't go through Amazon's platform.

And here's where it gets really important for multi channel sellers. In most states, your Amazon sales and your Shopify sales are both counted towards your economic nexus thresholds. So you might hit $100,000 in a state partly through Amazon and partly through Shopify, and the obligation applies to all of it.

4:29 What Shopify does and doesn't do

Let's talk about Shopify, because this is where we see the most confusion and honestly where the most expensive mistakes happen.

Shopify is not a marketplace facilitator, it's a sales platform. That is an important distinction. Amazon is acting as the seller on your behalf when it collects tax. Shopify is just getting you the store. When a customer buys from your Shopify store, that's a direct transaction between you and the customer. Sales tax on that sale is your responsibility to collect, remit and file.

Shopify does have tax tools built in, but there are three settings problems that show up over and over again.

5:02

Problem number one, tax collection being turned on without registration. This is one of the most common situations that we see, and it creates a very specific type of problem.

A seller gets a Shopify notification saying that they're approaching a nexus threshold in the state. Or they read something about economic nexus and decide to turn on tax collection everywhere just to be safe. So they go into Shopify settings and enable tax collection in 15 states all at once, but they haven't registered in those states yet.

Here's why that matters. You are not legally allowed to collect sales tax in a state without a valid sales tax permit. If you collect it without a permit, you've collected money that isn't yours to keep, and you're not in a position to remit it properly. Some states treat collecting without a permit as a separate violation on top of any underlying compliance issues. The right order is always cross the threshold, register, then turn on collection in Shopify, not the other way around.

6:02

The second problem is that Shopify's alerts are not a compliance system. Shopify will sometimes notify you when you're approaching a nexus threshold in a state, and sellers often read those alerts as, well, you don't need to worry about this until the notification shows up. But that's not what they mean.

Shopify's threshold tracking has limits. It may not be pulling in all your sales channels. It may not know about your Amazon sales. It may not account for the fact that some states count marketplace facilitator sales towards thresholds while others don't. Shopify's notifications are a helpful signal, but they're not a substitute for actually tracking your own nexus footprint across all of your channels.

6:40

The third problem is collecting the right amount in the wrong places. Sales tax rates in the US are not just state level. They include county and city rates on top of the state rate, and the combined rate changes depending on where your customer is located.

Shopify calculates these rates automatically when your settings are configured correctly. But if your tax settings are incomplete, or if your product tax codes are wrong, you can end up collecting the wrong amount. Collecting too little means that you owe the difference out of pocket. Collecting too much means you've overcharged your customers and you may owe them refunds. Neither situation is great. Both are fixable, but they require clean data to resolve.

7:27 Two very different problems

Now I want to make a distinction that matters a lot when you're figuring out how to clean this up. Not all past due sales tax situations are the same. They're really two different problems, and they have different causes, different implications, and different paths to resolution.

Situation one is you've collected, but you've never remitted. That's when your Shopify store was set up to collect sales tax from customers, the customers paid it, and then the money was never paid to the state. Maybe you didn't realize that you needed to file returns separately. Maybe the filings got missed. Maybe you were registered in the state but fell behind on the actual reporting.

Here's what makes this situation particularly serious. That money was collected in trust. Your customer paid it expecting it to go to the state. It's not business revenue. It's tax that was held on the state's behalf. States treat this differently than other compliance gaps. The liability is clear and documented. The money came in, it just didn't go out. That creates real urgency to resolve it quickly.

The good news is if you have data showing what was collected, you know exactly what you owe. There's no estimation involved. You get current on the filings and remit what's sitting there.

8:36

Situation two is if you've never collected at all. This is when you had nexus in the state and you were obligated to collect sales tax, but your Shopify settings weren't turned on, so customers were never charged. The state never received the tax and you have no record of having collected anything.

This situation feels less urgent because there's no money sitting in an account, but the liability is still real. You owe the state the tax that should have been collected, and in this scenario that money has to come out of your business. The amount owed is based on your taxable sales in that state during the period of non compliance. Then add penalties for not filing, add interest that's been compounding since the obligation began.

And this is the situation where voluntary disclosure agreements, or VDAs, become really valuable, because a VDA can limit how far back the state looks and significantly reduce the penalty exposure.

The key question when you're cleaning this up is which situation are you in, or are you in both at once? Because that shapes the whole resolution strategy.

9:41 Step one, get the full picture

Okay, let's talk about how to actually fix this. Because getting compliant sounds simple until you're looking at potential back taxes across multiple states and trying to figure out how to do that without your business bleeding out. Here's the approach that I'd recommend, in order.

Step one, get the full picture. First, before you pay anything or contact any state, you need to know exactly what you're dealing with. That means a proper nexus analysis. Every state, every channel, every inventory location. You need to know where you're registered, where you should be registered, how long the gap has been open, and what the estimated back tax exposure looks like.

A lot of sellers skip this step and start making calls to states or pulling together back payments. And then they find out they've admitted liability to a state where they might have had a strong case that they weren't actually over the threshold. Know the full picture before you start talking to anyone.

10:38 Steps two through five

Step two, prioritize by exposure. You probably can't fix everything at once, and you don't need to. Prioritize states where your exposure is highest, where enforcement activity is most aggressive, or where you have the collected but not remitted situation. Those are the most urgent. Lower exposure states can often be addressed through registration and proactive compliance first, with back periods handled through a voluntary disclosure later.

Step three, use voluntary disclosure agreements where you can. For states where you have back tax exposure and you haven't been found yet, a VDA is the most powerful tool available. You come forward before the state finds you. The state typically limits the lookback, usually to three or four years, and penalties are often reduced or eliminated entirely.

The cash flow benefit here is real. A VDA doesn't make the liability disappear, but it makes it smaller and more predictable. You know what you owe, you can plan for it.

11:40

Step four, negotiate the payment. If the total amount owed is more than you can pay at once, most states will work with you on payment plans. Interest continues during the payment plan, but it keeps you in good standing and keeps enforcement at bay while you work through the balance. Most states want all outstanding returns filed before they'll set up a payment plan, so get the filings current first, then have the payment conversation.

Step five, fix the settings going forward. Once you've handled the back periods, you need to make sure that the same problem doesn't rebuild itself. That means getting registered in every state where you have nexus, turning on collection in Shopify in the right order after registration is confirmed, verifying that your product tax codes are correct, and setting up a way to monitor your nexus footprint as you grow. Because economic nexus thresholds don't stop moving just because you fixed last year's problem. As your revenue grows, you'll cross new thresholds. The goal is to catch them before they become exposure.

12:38 Where to start

Here's what I want to leave you with. If you watched this and you started mentally running through your own Shopify settings, or thinking about which states that your FBA inventory might be sitting in right now, that instinct is worth following. The sellers who end up in the most difficult situations are usually the ones who noticed a nagging feeling like this and pushed it to the back burner.

The best first step is getting clear on where you actually stand. Not a rough guess, a real picture with real numbers. Now we've built a free sales tax risk assessment for exactly this. It's 18 questions. Takes about 5 minutes. You'll get your current risk level, a breakdown of what specifically needs attention across your nexus footprint, and a prioritized action plan for what to address first. It's built for sellers doing 1 to 50 million revenue across multiple channels who aren't completely sure that they've registered everywhere they should be. If that's you, the link is below.

13:31

And if you want to talk through your specific situation directly, that's what we do here at LedgerGurus. We specialize in ecommerce sales tax for seven and eight figure brands. Nexus analysis, registrations, VDAs, back filings, audit support, and ongoing compliance. We've helped a lot of sellers work through exactly the kinds of situations that I described in this video. You can reach our team through the link in the description.

If this was useful, please subscribe. We put out content like this regularly for ecommerce sellers who want to stay on top of their compliance and keep growing. It genuinely helps us keep making it.

Drop a comment and tell us what part of this surprised you most. Was it the Shopify settings piece? The Amazon registration question? We read every comment and they help us figure out what to cover next.

And if you have a friend running an ecommerce business who's in the, well, I'll deal with it later phase on sales tax, send this to them. It's a lot cheaper to watch the video than it is to get that letter. I'll see you in the next one.